Can Caterpillar Keep Up?

As the largest maker of construction and mining equipment on the planet, Caterpillar (NYSE:CAT) is often used as a bellwether not just for the industry, but for the economy at large. This may seem a bit heavy-handed for a company with a market capitalization of just $63.17 billion — Apple (NASDAQ:AAPL) basically sweat this company’s market value off overnight — but Caterpillar sells products that drive industries, which drive economies.

So, when Caterpillar reports that machine sales dropped for the first time in over two and a half years, a shiver of uncertainty passes through the markets. According to the company’s report (which is unaudited, for what it’s worth), global machine sales fell 1 percent in the fourth quarter. This is highlighted by a 7 percent drop in Asia, and a 6 percent drop in North America.

Such information is cause for concern for a number of obvious reasons. Economic indicators have been struggling to remain positive and turn market sentiment around. Unemployment claims are down, the housing recovery is developing (with a few bumps), GDP will hopefully tick upwards, and if we’re lucky, in a generation this whole global financial disaster will be confined to textbooks and bar talk. Not to over-dramatize the significance of Caterpillar’s sales dip, but it’s hard not to assign a lot of weight to the results. Shares are up nearly 8 percent since the start of the year, riding high on economic happy-talk and strong expectations…

Compounding the North American drop is the decline in Asia, where growth has been the story for so long, and must remain the story if a global recovery is to gain traction. Knowing that sales in these regions have slowed has already caused analysts to lower their estimates. Expectations are that the company will report a soft forecast for 2013 with its earnings release on Monday.

To punctuate the mood, Caterpillar recently reported that it will be forced to report a charge of $0.87 per share because of accounting misconduct at a subsidiary in China. This is not just costly monetarily, but has raised a number of red flags about the company’s vetting process, and whether there are any problems at any of its other subsidiaries.

At the end of the day on Friday, shares were off about 1 percent. Analysts are looking for a 26.7 percent year-over-year drop in net income to $1.70 per share, and a 6.3 percent decline in revenue to $16.16 billion.

Meanwhile, competitors continue to advance their stock price at tremendous speeds. CNH Global (NYSE:CNH) is up over 15 percent this year to date, while Oshkosh (NYSE:OSK) surged over 18 percent after its earnings on Friday morning. The company increased its net income by 19 percent year over year, towing a 6 percent drop in revenue.